The world's oldest bank has been cut to "junk" by Moody's, as the rating
agency warned that there was a "material probability" that the lender may
need another cash injection from the Italian government.

The downgrade from Baa3 to Ba2 means some investment funds that hold Monte Paschi bonds will be forced to sell them, making it even harder for the bank to raise funds.

Monte Paschi was the only Italian lender to fail the European Banking Authority's stress tests and is the first of the five main Italian banks to fall below investment grade.

In a statement, Moody's said that there remained "a material probability" that the bank will need to seek further external support over the rating horizon.

"Given the weak growth prospects for Italy's economy and the EU operating environment, there is a strong probability that the bank would not be able to generate sufficient capital internally to maintain regulatory capital levels," it added.

The downgrade from Baa3 to Ba2 means some investment funds that hold Monte Paschi bonds will be forced to sell them, making it even harder for the bank to raise funds.

"Unless there's the express request from the investor we can't buy junk status bonds. And if we have them in our portfolio we have to sell," said Roberto Lottici, fund manager at Ifigest. "For shares, there will be a discussion in the investment committee."

However, the bank's chief executive insisted that the bank was adequately funded. Fabrizio Viola told Reuters that he did not forsee any immediate impact from Moody's downgrade and that the €1.5bn in state aid that the bank had already requested meant it no longer had a capital shortfall problem.

"I cannot hide my disconcert for the timing and the reasons of the decision," he added.

The bank's shares fell by as much as 7.3pc on Thursday morning, to €0.2291.